Arctic Blast Wreaks Havoc on Energy Markets in the Heartland (and Potentially Beyond)3 min read
During Constellation’s February Energy Market Intel Webinar, Constellation market analysts provided a detailed look at the weather in the Midcontinent, the emergency in ERCOT, the general fundamentals in the natural gas market, such as storage and production, and briefly touched on the economy.
Constellation’s chief meteorologist, Dave Ryan, highlighted the extreme winter event that drove temperatures to all-time lows in Texas, Oklahoma, Kansas, Missouri and others in the middle of the country. A bolt of severe cold air dominated a region from the Rocky Mountains to the Appalachians and from Canada to the Gulf of Mexico. The potential for Arctic air to move into The Lower 48 has been developing for the past two months as the upper-atmospheric “blocking” that is needed to allow for very cold air to move south was in play. Ryan noted that the worst of the Arctic blast was winding down and that temperatures in Texas and several other states would be returning to normal by the weekend of February 20th.
He also discussed the outlook for the remainder of February and March pointing out that, although it will warm up significantly in Texas and the southern states generally, the outlook for the upper Midwest and Mid-Atlantic/Northeast is likely to remain seasonally cold and stormy.
The Historic Winter Storm in Texas
The Commodities Management Group’s (CMG) Keith Poli provided a detailed summary of events in ERCOT where widescale power outages occurred leaving as many as 4 million people without power for several days amidst subfreezing temperatures that were on average 35 degrees Fahrenheit below normal for February in Texas. ERCOT was also employing a series of rolling blackouts across the state as a means of not only supplying a short supply of power to more people but also as a means of maintaining the integrity of its system.
The brutal cold air acted to shut down natural gas, wind, coal, nuclear and thermal sources of electric generation, thereby crippling supply, while at the same time causing a winter demand spike of historic proportion. In addition to surging natural gas demand, the Arctic blast significantly began to reduce the supply of natural gas as wells began to freeze in Texas. With supply of electric power severely reduced amid peaking demand, power prices throughout ERCOT skyrocketed to $9,000/MWh as the Public Utility Commission of Texas directed ERCOT to initiate a scarcity pricing event. ERCOT reported that large parts of the state were on the path to having power restored on Thursday, February 18. The scarcity pricing event known as Emergency Energy Action (EEA 3) ended at 9 a.m. CST on February 19th.
CMG covered the natural gas market pricing action with a discussion regarding physical cash price blowouts from coast to coast caused by the polar vortex. Past weather events have caused large spikes in price in the past, but those price spikes were more regionally confined to the actual location of the cold air. The CMG team brought attention to the more “national” nature of the spot market pricing action as prices are affected west-to-east and north-to-south.
Storage and Production Update
The cold blast is also playing a big role in adjusting the forecast downward for end-of-winter natural gas underground storage inventories. Last month, at this time, there was growing doubt that inventories would be below the five-year-average at the end of winter. The frigid air has changed that forecast and it is now likely that inventories will be lower than average and likely significantly so. Natural gas production started the month of February at 90 Bcf per day, but the polar vortex caused thousands of wells to freeze, knocking down production to 67 Bcf per day. The governor of Texas ordered natural gas producers in Texas to sell their output only within the state through February 21 to make supplies available to Texas consumers.
It will be several days before the smoke begins to clear relative to the great polar vortex of 2021. This event is likely to trigger various discussions regarding wide-scale power generation system failures, regulatory oversight and market reforms, as well as renewed focus on redundancy and reliability issues.
We invite you to join us for our next Energy Market Intel Webinar where Constellation energy experts continue to offer detailed and timely updates related to the energy market, economy and weather, and much more each month. Register by visiting www.constellation.com/marketintelwebinar.